The Costs of Corruption Incurred by Infrastructure Project Stakeholders

This section considers the types of loss and damage caused by corruption and suffered by:

members of the public
the project owner
project funders
construction companies, consulting engineering firms and suppliers
employees of the above organisations, and public officials.

(1) Loss and damage suffered by members of the public

Members of the public may suffer loss and damage as a result of corruption on a particular infrastructure project, and as a result of widespread corruption in the infrastructure sector generally. Such corruption may result in:

Inadequate infrastructure: Lack of proper roads, railways, schools, hospitals, power and water supplies, and housing.
Dangerous infrastructure: For example, where bridges are not properly supported, or where housing and shops are built without adequate foundations, steel reinforcement or fire safety measures.
Displacement of people: For example, where people are moved to make way for large scale projects such as dams and mines and are not properly re-housed or compensated.
Damage to the environment: For example, where air quality or water supplies are damaged.
Reduced spending in infrastructure: For example, where investors are reluctant to commit funds to the sector due to lack of confidence that the money will be properly spent.
Reduced public expenditure: Depleted public funds, as a result of funds having been stolen or wasted through corruption, results in reduced public expenditure.
Reduced foreign investment: A loss of confidence in the country as a result of the perceived prevalence of corruption will result in reduced foreign investment.

As a result of the above factors, the members of public affected may suffer the following categories of loss and damage:

Loss of quality of life and opportunity: Lack of proper infrastructure will result in inadequate transport, education, health care, water, power, housing, hotels and workplaces.
Loss of earnings: Lack of education, transport, health care, water, power, housing, hotels and workplaces will result in a less qualified work force, ill-health, reduced tourism, and difficulties in producing and transporting agricultural produce, raw materials and manufactured goods. These in turn will result in reduced employment and trade, with resultant reduced earnings for the people.
Increased taxation: Where public funds have been depleted through corruption, taxation may need to be increased to make up the shortfall.
Injury and death: People may be injured or die due to indequate or dangerous transport or health facilities.

(2) Loss and damage suffered by the project owner

The project owner is the organisation or individual for whom the project is being constructed, and who owns the project outcome. It could be a public sector body, or a private sector organisation or individual. The following are the categories of loss and damage that may be suffered by the project owner as a result of corruption in connection with the project.

Theft of project funds:

Project funds intended for spending on specific projects may be misappropriated before ever reaching their intended purpose.

Waste of project funds:

Project funds may be wholly or partially wasted where there is corruption in project selection or project design resulting in non-viable projects or projects which are unsuitable for the intended purpose (“white elephant projects”). Examples of this are where:

A project is selected primarily because it is large and capital intensive and so will provide ample opportunity for large bribes and/or misappropriation of funds, or because its location will benefit a corrupt party. The result may be that the project is of no or little use to the project owner.
Waste of project funds may occur where a project is over-designed so that it is too sophisticated for the intended purpose but with the corrupt intention that the over-design will maximise profits for the relevant corrupt parties.
A project which was viable and appropriate at the outset may collapse or be rendered unviable as a result of corruption which takes place during the structuring or execution of the project.

Increased price of projects:

Corruption may result in an inflated project price being paid by the project owner. For example:

Corruption in the design phase may result in an overly expensive design being produced so as to give preference to a particular supplier.
Corruption in the financing phase may result in onerous financing terms being paid by the project owner.
Corruption in the tender stage for one or more project contracts may result in the corrupt winning contractor including the cost of the bribe in the contract price and/or additionally inflating the contract price because it knows that there is no genuine competition.
Corruption during project execution may result in an inflated final contract price due to the certifier being bribed by a contractor to approve fraudulent claims.

Increased maintenance, repair and replacement costs:

Corruption may result in the final product (for example, the completed road, hospital or dam) being defective or dangerous. This may be due to:

the corrupt supply of defective works, services and/or materials which have either been concealed from the certifier or been corruptly approved by him
the incompetence of the contractor who won the contract through bribery.

These defects may necessitate increased maintenance, repair and replacement works.

Additional financing costs:

Corruption may result in the project financing costs being increased. For example:

Corruption in the provision of financing (such as a bank paying a bribe to the project owner’s representative to approve the project financing) may result in the finance fees and interest charges being higher than market rates.
Any additional capital or operating costs of the project caused by corruption will need to be financed, and such financing will incur additional financing costs.

Cost of bribes paid by the private sector project owner:

A private sector project owner may choose or feel compelled to pay bribes to a government official in a number of situations including:

to obtain consent to proceed with a project
to obtain the necessary planning permits
to reduce the stringency of environmental, social or health and safety conditions
to improve revenues from any purchase or use of its product
to reduce taxes payable on the project.

In many cases, the project owner will succeed in recovering the cost of those bribes through the operating or other profits made on the project, so that the cost of the bribes will ultimately be borne by the consumer or end-user. However, to the extent this is not possible, then the cost of the bribes will be a cost of corruption borne by the project owner.

Reduced operating profits:

A defective project may prevent the project from operating, or from operating to full capacity, resulting in reduced revenue. For example:

A defective toll road may have to be closed for repairs and so will be unable to collect tolls for that period.
A defective power station may be unable to provide electricity, and so will be unable to receive revenue from generated electricity until the defects are remedied.

Increased operating costs:

Corruption may result in the project owner being burdened with excessive operating costs. This may happen, for example, where an employee of the project owner is bribed to agree to unduly favourable terms for the party operating the completed project.

Loss of business opportunity and investment:

Corruption on a project may result in damage to the reputation of the project owner. This may occur, for example, where:

the project owner or its employees are suspected or convicted of corruption
the project owner is perceived to have failed to implement adequate anti-corruption measures both on the project and within its own organisation.

The result may be that the project owner may find it more difficult to find business partners or investors for its projects, or only on less favourable terms, due to loss of confidence in the competence or integrity of the project owner.

Damages for civil liability:

The project owner may incur civil liability to stakeholders who have incurred loss and damage as a result of corruption on the project. For example:

Where project funds have been misappropriated, or where they have been invested in a white elephant project, the project owner may be sued by investors for loss or wastage of public funds.
If one of the project owner’s employees has been taking bribes to award contracts, other tenderers may sue the project owner to recover lost bidding costs.
If the certifier on a project has been bribed to approve defective works which have resulted in injury to members of the public (e.g. the collapse of a bridge), those members of the public may sue the project owner.

Fines for criminal liability:

The project owner may incur criminal liability, resulting in fines and debarment, in cases where:

it has deliberately perpetrated corrupt activity
it is responsible for corrupt activity by its employees
it has failed to implement proper anti-corruption measures where it was legally required to do so.

Legal fees:

Where there is corruption in which the project owner is involved, or in relation to which it is the victim, there may be consequent criminal or civil legal actions, which will result in the project owner incurring significant legal fees.

Loss and damage to employees of the project owner:

The cost of corruption for employees of the project owner are discussed under section 4 “Loss and damage to employees”.

(3) Loss and damage suffered by project funders

The project funders are the organisations or individuals which provide equity, loans or guarantees in relation to the project. The following are the categories of loss and damage that may be suffered by a project funder as a result of corruption in connection with the project:

Total or partial loss of investment:

Corruption may result in the funder investing in a non-viable project, or in a project that is subsequently rendered unviable by corruption during the project. This may occur, for example,:

where an employee of the project funder is bribed by the project owner to approve a loan to an unviable project
where there is fraudulent misrepresentation by the project owner to the funder as to the viability of the project
where the funder fails to carry out adequate due diligence on the project, and so does not appreciate the potential for corruption which subsequently renders the project unviable.

Reduced profitability:

The project owner may bribe or collude with an employee of the project funder to provide project financing on terms which are unduly favourable to the project owner (such as lower fees or financing costs). The funder as a result loses revenue.

Cost of bribes paid by the funder:

A project funder may choose or feel compelled to pay bribes in a number of project situations, such as:

a bribe to win the financing contract
a bribe to secure more favourable financing terms.

In most cases, the project funder will succeed in recovering the cost of those bribes through the financing charges so that ultimately the project owner (and in public sector cases, the public) will bear the cost of those bribes. However, where this is not possible, the cost of such bribes will be borne by the project funder.

Loss of business opportunity and investment:

Corruption in the project financing terms or on the project itself may result in damage to the reputation of the project funder. This may occur where:

the project funder or its employees are suspected or convicted of corruption
the project funder is perceived to have failed to implement adequate anti-corruption measures within its own organisation, or to have failed to require anti-corruption measures to be implemented on the project.

The result may be that the project funder may find it more difficult to find business partners or investment opportunities due to loss of confidence in the competence or integrity of the project funder.

Damages for civil liability:

The project funder may incur civil liability to stakeholders who have suffered loss and damage as a result of corruption in the project financing or on the project itself. For example:

Where funds lent by the project funder have been lost due to a corrupt project, the project funder’s shareholders or investors may sue the project funder for damages.
If corrupt activity by one of the funder’s employees resulted in the financing terms being unduly onerous for the project owner, the project owner may sue the project funder for damages.

Fines for criminal liability:

The project funder may incur criminal liability, resulting in fines and debarment, in cases where:

it has deliberately perpetrated corrupt activity
it is responsible for corrupt activity by its employees
it has failed to implement proper anti-corruption measures where it was legally required to do so.

Legal fees:

Where there is corruption in which the project funder is involved, or in relation to which it is the victim, there may be consequent criminal or civil legal actions, which will result in the project funder incurring significant legal fees.

Loss and damage to employees of the project funder:

The cost of corruption for employees of the project funder are discussed under section 4 “Loss and damage to employees”.

(4) Loss and damage suffered by contractors, sub-contractors, suppliers and consultants

The following are the categories of loss and damage that may be suffered by contractors, sub-contractors, suppliers and consultants (“contractor”) as a result of corruption in connection with the project:

Bribes paid in tendering by successful tenderers:

During the tendering for project contracts, procurement managers may demand bribes, or the contractors may offer bribes, in order to win contracts. The winning contractor may ultimately bear the cost of these bribes, or it will try to recover the cost of the bribes by inflating the contract price. In the latter case, the cost of the bribe will ultimately be borne by the project owner (which, in the case of public sector projects, will be the public).

Bribes paid in tendering by unsuccessful tenderers:

A contractor that has paid a bribe to win a contract, but has not been awarded the contract, will bear the cost of the bribe paid.

Wasted tender costs:

If the tendering procedures on project contracts are corrupt, then contractors that fail to pay a bribe will generally have no real chance of winning the contract, and their tender costs will therefore have been wasted.

Increased costs:

Corruption may increase the operating costs of contractors. For example:

A contractor may refuse to pay bribes to obtain work permits and import licences. This may result in delay to the works, which in turn results in additional costs being incurred by the contractor, and the obligation on the contractor to pay damages for delay to the project owner.
A contractor may choose or feel compelled to pay bribes or facilitation payments:
- to obtain work permits and import licences
- to receive contract payments due
- to have legitimate or fraudulent claims approved
- to have legitimate or unduly onerous environmental or safety requirements removed
- to have legitimate or defective works or services approved.

In some cases, the contractors will have included the cost of these bribes in their contract price, or will be able to recover the cost by, for example, fraudulently inflating contract claims. In this case, the cost of the bribes would be borne by the party with whom they are contracting, and possibly ultimately by the project owner if the costs are passed all the way up the contract chain. To the extent that they are unable to pass on the cost of these bribes, these bribes will be an additional cost to the contractors.

Loss of revenue:

Corruption may cause a contractor to lose revenue. For example:

A contractor may refuse to pay bribes to obtain contract sums or approval of claims which are properly due. This may result in the contractor not receiving payment for those contract sums and claims.
A project owner may fraudulently undervalue works, services or materials, or fraudulently allege that works are defective, and may as a result refuse to make proper payments to the contractor.

Termination of contracts:

Where a contractor is proved to have won a contract through corruption, the project owner may be entitled to terminate the contract without any compensation to the contractor. The contractor will as a result lose all of its costs incurred in relation to the project.

Loss of work:

Where it is generally known that there is likely to be corruption on a project, ethical contractors may decide not to participate in the project. This may extend to a sector or country as a whole so that ethical contractors withdraw from a whole sector and/or a country because of the prevalence of corruption.

This will result in lost business opportunites and work for the contractor.

Loss of business opportunity and investment due to loss of reputation:

Corruption on the project may result in damage to the reputation of the contractor, if it is believed that the contractor may have had some involvement. This may occur where:

The contractor or its employees are suspected or convicted of corruption.
The contractor is perceived to have failed to implement adequate anti-corruption measures within its own organisation.

The result may be that the contractor may find it more difficult to find business partners or to win contracts due to loss of confidence in the competence or integrity of the contractor.

Loss of business opportunity due to debarment:

Where a contractor or any of its senior managers are convicted of a corruption offence, this may result in the contractor being temporarily or permanently debarred from participating in certain public sector projects.

Damages for civil liability:

A contractor may incur civil liability to stakeholders who have suffered loss and damage as a result of corruption for which the contractor is responsible. For example:

Where a contractor has paid a bribe to win a contract and has then included the cost of that bribe in the contract price, or where a contractor has fraudulently inflated a claim, the project owner may sue for recovery of the cost of the bribe and unjustified payments made.
Where a contractor has fraudulently provided defective works:
- the project owner may sue the contractor for the cost of repairing those works and for any loss of profit in being unable to operate the works
- members of the public may sue the contractor for any loss and damage they have suffered as a result of those defects.

Fines for criminal liability:

The contractor may incur criminal liability, resulting in fines, in cases where:

it has deliberately perpetrated corrupt activity
it is responsible for corrupt activity by its employees
it has failed to implement proper anti-corruption measures where it was legally required to do so.

Legal fees:

Where there is corruption in which the contractor is involved, or in relation to which it is the victim, there may be consequent criminal or civil legal actions, which will result in the contractor incurring significant legal fees.

Loss and damage to employees of the contractor:

The cost of corruption for employees of the contractor are discussed under section 4 “Loss and damage to employees”.

(5) Loss and damage suffered by employees and public officials

The following are the categories of loss and damage that may be suffered by employees who work for organisations which are involved in the project, and public officials who work in connection with the project, as a result of corruption on the project:

Loss of income due to loss of employment:

Employees and public officials may lose their employment, and consequently lose income, if:

an organisation involved in the project becomes insolvent or reduces its workforce as result of losses incurred on the project due to corruption
an employee or public official is suspected or proved to have been involved in corruption, and is as a result dismissed from employment.

Damages for civil liability:

An employee or public official may become involved in corruption on his own behalf or on behalf of his employer. In either case, the employee or public official may have to pay compensation to any organisation or person who suffers loss and damage as a result of the corruption.

Imprisonment and/or fines for criminal liability:

An employee or public official may become involved in corruption on his own behalf or on behalf of his employer. In either case, the employee or public official may be prosecuted, and be imprisoned and/or pay fines, and lose employment income during the imprisonment.

Legal fees:

Where there is corruption in which the employee or public official is involved, there may be consequent criminal or civil legal actions, which will result in the employee or public official incurring significant legal fees.

Injury or death:

Corruption on a project may lead to the injury or death of an employee or public official. This may occur, for example, when:

corruption has resulted in lack of safety measures or in defective works causing accidents
an employee or public official who reports corruption or suspicions of corruption, or is a witness to corruption, may be injured or killed in retaliation, or to prevent them from giving evidence.

Updated on 6th April 2024